Utah Business Blog

By Dave Young, President, Paragon Wealth Management

Often, successful investing requires you to act in a way that is contrary to what you "feel" is right. For example, there are models that measure the overall optimism or pessimism in the investing public. When optimism is high an investor can know that there’s a lot of risk in the market and it’s likely that the market will decline. Likewise, when optimism is low and most investors think that things are really bad, that is usually a great time to invest. This pattern has repeated itself for years.

I don’t have last year’s numbers yet but if the pattern of the last 20 years continues then the results will be similar to 2007’s numbers shown below. Every year seems to follow the same pattern. One thing the forecasters can claim is consistency because they are consistently WRONG!

* 82% of money managers believed in late December 2006 that long-term interest rates in the US would be "unchanged or higher 12 months later." The yield on the 30-year Treasury bond was not "flat to higher" but rather declined from 4.81% to 4.45% during calendar year 2007 (source:  Merrill Lynch ).

* 56 economists who were surveyed in mid-January 2007 predicted that the average price of oil would be $58 a barrel in the 4th quarter 2007, down $3 a barrel from its $61.05 price of 12/31/06. However the price of oil did not fall but rather rose +57% during 2007, closing last year at $95.98 a barrel (source:  USA Today ).

* The S&P 500 was up +9.2% YTD (total return) through Friday July 20, 2007, closing at 1534. The headline in Barron’s over that weekend stated "It’s Still Time to Buy" forecasting an additional +6% rise to 1625 by December 31, 2007. Instead the stock index fell 4.3% to finish 2007 at 1468. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source:  Barron’s ).

* With four months remaining in the year, Barron’s asked eight equity strategists to predict where the S&P 500 would finish the calendar year. Seven of the eight saw a rising stock market by year-end with one prognosticator foreseeing a December 31, 2007 value of 1700. The S&P 500 actually finished the year lower at 1468. (source:  Barron’s ).

Also, from a long term historical perspective here is some more interesting "market forecast" trivia. This is courtesy of Direxion’s "By the Numbers" publication.

* On the morning of October 19, 1987, the trading day that ultimately resulted in the largest one-day percentage loss in the history of the S&P 500, the Wall Street Journal ran a front-page article with the subtitle "Some Stay Bullish, Believing Downturn is Temporary." The S&P 500 fell 20.5% that day (source:  Wall Street Journal ).

* On August 13, 1979, BusinessWeek ran a cover story titled "The Death of Equities." The S&P 500 closed at 107 on August 13, 1979. The S&P 500 closed calendar year 2007 at 1468 (source:  BusinessWeek ). Apparently equities didn’t die…

* At the close of business on Wednesday October 9, 2002, the S&P 500 bottomed at 777 before beginning a bull market run that gained +101% to peak at 1565 on October 9, 2007, exactly five years to the day after the bear market bottom. The headline in the business section of USA Today on Thursday morning October 10, 2002 was "Where’s the Bottom, No End in Sight" (source:  USA Today ).

The moral of the story is that forecasts make interesting conversation and trivia. Just don’t use them to try to make money.

About the Author

Dave Young, President and founder of Paragon Wealth Management, started Paragon in 1986. Today he continues to invest and research ways he can improve his business to serve his clients better. His methods have attracted national and local attention. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, the Deseret Morning News and other national and local media. He has also written articles for Utah Valley Magazine, Utah Valley Business Q, Utah CEO Magazine’s blog, Paragon’s blog called Money Manager’s Live and others.

By Dave Young, President of Paragon Wealth Management

There’s no shortage of self-proclaimed market prophets in Utah and throughout the nation. You can find them in the investment magazines, newspapers or CNBC. Although they can be entertaining, they provide no real investment value. They do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.

The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck maybe half of these predictions are proven right-meaning that at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. Those many forecasts that don’t pan out (and those many investors who are financially hurt by them) are never spoken of again. In truth, you’re much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least they inflict less damage when they’re wrong.

Yet despite mountains of data that show how ineffective the celebrity market forecasters are, they continue to make their predictions and many unfortunate people continue to base their financial decisions on shoddy, unproven advice.

Market professionals are not alone in their inability to forecast market behavior. Economists do just as poorly. Every six months the Wall Street Journal prints the results of a survey of leading economists who predict the level and direction of interest rates for the coming six months. 55 high profile economists currently participate in this semiannual forecast. You’d think such prestigious economists in such a high profile newspaper would know what they’re talking about, right? Nope.

If they’d just blindly guessed they’d have a 50/50 chance, but their actual educated predictions turn out to be much worse. And these are the best the industry has to offer!

So if forecasts are a waste of time then what does work? I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy-even the gut feelings of so-called experts.

In this final part of the podcast of the Utah Venture Entrepreneurial Forum event, the financial funding panel answers more questions from the audience, mainly dealing with what financial investors are looking for in a small business that needs capital.

In part 2 of this podcast of the Utah Venture Entrepreneurial Forum, the financial capital panel answers questions from the audience on how to best approach an investor when searching for money to operate a business and more.

This podcast is of the Utah Entrepreneurial Forum event held in Provo at the Novell Cafeteria on September 11, 2008. The forum titled, “Meet the Money’ was a financial funding panel discussion presented by leaders in financial capital in the state of Utah. You will hear all the speakers in order introducing themselves in Part 1 of this podcast: Arthur Newell from Wells Fargo Bank,  Josh Case from M.J.M. Capital, Jeremy Neilson from Utah Fund of Funds, Stan Kanarowski from Park City Angels, and Gavin Christensen from KickStart Seed Fund.